The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

More documents

Recommendations

Info

The Pharmaceutical Price Regulation Scheme Competition to supply pharmacies when a drug is reimbursed as a generic 2.89 When GPs write generic prescriptions for an off-patent chemical, a range of suppliers compete to sell to pharmacies. Competing suppliers include the manufacturer of the originator brand, makers of all bioequivalent generics (including branded generics) and parallel importers. 2.90 The supply chain for generics is similar to that for branded drugs, involving manufacturers, wholesalers (short line and/or full line) or direct supply and pharmacies. Competition between generic manufacturers tends to be vigorous, and consequently for most products they have little ability to sell at higher prices in the UK than other EU countries. Hence, parallel imports of generics tend to be unimportant. 2.91 Individual pharmacies’ reimbursement prices for generic drugs do not depend on what they individually pay for the drug. Again, therefore, pharmacies are strongly motivated to purchase from the cheapest supplier. We discuss some aspects of competition to supply pharmacies in the following sections. We consider first competition between generic manufacturers through Scheme M and second competition between branded and generic suppliers. Competition between generic manufacturers: Scheme M 2.92 Around 90 per cent of generic medicines (by value) are listed under Category M of the Drugs Tariff. Prices for drugs in Category M are set by DH and are based on a calculation that incorporates the volume-weighted average prices charged by generics manufacturers in the UK. 20 2.93 The use of average prices among manufacturers aligns the reimbursement of generic drugs with the market conditions in which they are sold. This process maintains the incentives for individual pharmacies to procure generic drugs efficiently, as reimbursement is based on average prices and pharmacies can negotiate with suppliers to secure a better than average price. Rules governing this system are set out in an agreement known as Scheme M. 2.94 Scheme M has led to strong competitive pressure on generics prices, with UK prices held to be among the lowest in Europe. The system is considered to be a well managed and efficient form of pricing generics, which has worked well to ensure that competition between generic manufacturers delivers savings for the NHS. There was, initially at least, some concern about the volatility of generics prices, although these have now largely been addressed. 2.95 However, under the current arrangements, drugs dispensed as generics contribute the bulk of the £500 million retained pharmacy margin under the pharmacy contract, and pharmacies’ average margin on generics is considerably higher than on brands. While margins on domestically sourced brands are generally about 1 to 1.5 per cent, we understand that margins on some generics, in particular some category M drugs, are much higher – sometimes over 50 per cent. 2.96 The reimbursement regime is very different for on-patent brands, which are currently priced under PPRS. The very different level of margin attached to generic and branded reimbursement is a potential source for concern. This can be a source of considerable advantage to branded manufacturers competing with generics, since it allows them to market their products to GPs and PCOs as cheaper than generics and yet still to sell to pharmacies at a much higher price. This has the potential to distort competition between brands and generic equivalents in the market for GP prescriptions. 20 The average is a volume-weighted average factory-gate price charged by generic manufacturers, which are obtained from quarterly surveys. A stochastic element is added to the calculations each quarter, to avoid gaming. 32
February 2007 Branded and generic competition: brand equalisation 2.97 Generic prescriptions can be filled by either branded or generic versions of the drug prescribed. A number of branded drug manufacturers compete with generics in supplying the pharmacy against a generic prescription. 2.98 One approach, known as brand equalisation, involves the brand manufacturer offering a pharmacy a single blended price for the supply of the branded drug to be dispensed against both branded and generic prescriptions. The blended price may provide the pharmacy with a greater margin than stocking both branded and generic drugs. This is profitable for manufacturers as long as the lower prices are still above the costs of supply. Estimates from the British Generic Manufacturers Association (BGMA) suggest that brand equalisation may account for on average 10 to 15 per cent of the total supply of generic prescriptions. Conclusion on competition to supply pharmacies 2.99 This section has assessed the nature of competition to supply pharmacies. This will provide a basis for an assessment of the effects of the PPRS and options for reform later on in the report. 2.100 When a drug is reimbursed as a brand (as is the case for reimbursement of on-patent drugs and branded prescriptions), competition is between the branded manufacturer and parallel importers to supply the pharmacy. When a drug is reimbursed as a generic, competition is primarily between generic manufacturers through Scheme M, but may also come from branded suppliers, for example through brand equalisation deals, and, to a lesser extent, parallel importers. In both cases, pharmacies are strongly incentivised to negotiate competitive prices with suppliers, delivering savings to the NHS providing these are picked up through margin analysis. 2.101 However, differences in the method of calculating reimbursement prices between brands and generics mean that the levels of margin earned on dispensing as a brand (at least, for domestically-sourced supply) are much lower than those earned on dispensing as a generic. This can be a source of considerable advantage to branded manufacturers competing with generics, since it allows them to market their products to GPs and PCTs as cheaper than generics and yet still to sell to pharmacies at a higher price. This also increases costs to the NHS. Hospitals 2.102 Hospitals across the UK purchase their own drugs, negotiating purchase prices that are often below manufacturer’s list or Drug Tariff prices. Hospitals can also control prescribing with more certainty than primary care organisations. Hospital doctors are employees so adherence to formularies, or guidance put out by internal Drugs and Therapeutics Committees, can be made a contractual term of employment. Incentives to procure drugs 2.103 In general NHS hospitals have sharper incentives to contain drug costs than PCOs and GPs. This is mostly due to how hospitals are funded and is especially true in England, where hospitals compete for business from PCTs in an internal market for healthcare interventions. Under this system of ‘Payment by Results’ (PBR) most services delivered by hospitals are subject to a National Tariff, set according to the average national cost of delivering it, though regional 33
Page 1 and 2: The Pharmaceutical Price Regulation
Page 3: February 2007 CONTENTS Chapter Page
Page 86 and 87:
The Pharmaceutical Price Regulation
Page 88 and 89:
Page 90 and 91:
Page 92 and 93:
Page 94 and 95:
Page 96 and 97:
Page 98 and 99:
Page 100 and 101:
Page 102 and 103:
Page 104 and 105:
Page 106 and 107:
Page 108 and 109:
Page 110 and 111:
Page 112 and 113:
Page 114 and 115:
Page 116 and 117:
Page 118:
show all

The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

Create successful ePaper yourself

Delete template?

Save as template?